John Paulson's Outside Capital Base Crashes To Under $2 Billion

Back in 2011, after making a killing off of his infamous mortgage short, John Paulson found himself running one of the largest hedge funds on wall street with $38 billion in total capital under management, including roughly $19 billion in outside capital. But, after gaining instant fame with his massive subprime bet, Paulson can't seem to buy a clue in recent years which has left many investors wondering whether he may have been nothing more than a "one-trick pony".

For those keeping track, an investor who contributed $100,000 to the Paulson Advantage fund on 12/31/2010 would have under $24,000 left today...and that's before removing Paulson's annual fees.

Therefore, it's not terribly surprising that, as Bloomberg points out today, Paulson's assets under management have crashed since 2011 to under $10 billion due a combination of abysmal returns and investor redemptions. But, what is surprising is that, per the charts below, of the the $9.5 billion currently under management at Paulson & Co., only $1.8 billion is from outside investors.

Of course, it's hard work losing that much money...it requires an army of Harvard MBAs and those guys aren't cheap. Unfortunately, since Paulson probably doesn't pay fees on his personal ~$8 billion in AUM, we suspect it's getting a bit harder to pay that Harvard army these days prompting speculation that Paulson will eventually have to return outside capital and convert to a family office. Per Bloomberg:

“As outside assets continue to erode, the running question for Paulson becomes more forceful: Why doesn’t he just convert to a family office?” said David Tawil, the founder of Maglan Capital LP, a New York based hedge fund that specializes in event-driven strategies. “But to get the firm back on the rails, I don’t think is impossible.”

Paulson, 61, is making the choice to fight back. The billionaire has no plans to turn the firm into one that solely manages his own wealth, according to a person familiar with his thinking. He’s opened at least three new funds in the past two years, including a private equity fund with a seven-year lock up. But at the end of 2016, that fund contained almost all internal money, the filing shows.

As we pointed out last November, Paulson's losses came in part due to a massive bet on the consolidation of large multi-national pharmaceutical businesses which he hedged with bearish bets on the broader markets. Unfortunately, exactly the opposite happened with the broader markets holding up while his largest pharma holdings collapsed anywhere from 20% - 40%.

Mr. Paulson’s hedge-fund firm, Paulson & Co., is suffering painful losses this year, extending a period of uneven performance that has left the firm managing about $12 billion, down from $38 billion in 2011. Behind the recent difficulties: A big, faulty bet on pharmaceutical companies, as well as excessive caution about the broader market, according to people close to the matter.

Over the past two years, Mr. Paulson has argued to his investors that the pharmaceutical industry’s consolidation would accelerate, boosting growth prospects of specialty drug companies cutting deals. Six of Paulson & Co.’s 10 largest holdings as of June 30 were pharmaceutical companies, the most recent securities filings show, including the firm’s four largest positions. At one point in late 2014, Mr. Paulson told a client that one of Paulson’s major holdings, Valeant Pharmaceuticals Inc., would hit $250 a share. At the time, the stock was trading at around $140. To hedge, or protect, his drug investments, Paulson adopted bearish positions on the overall market, viewing stocks to be expensive.

The trades haven’t worked out. Health care is the worst performer among the 11 sectors in the S&P 500, with a drop of 6.1% so far this year. Paulson’s holdings have done worse. Shares of the firm’s largest investment, U.K. pharmaceutical company Shire PLC, are down 19% so far in 2016. The holding, worth about $864 million at current share prices, represented 9.1% of Paulson & Co.’s portfolio at the end of June, according to FactSet Research Systems Inc. The next three biggest Paulson investments, Mylan NV, Allergan PLC and Teva Pharmaceutical Industries, are down 37%, 40% and 40% this year, respectively. The three stocks represent $2.16 billion of investments for the firm at current prices. Meanwhile, the S&P 500 is up 2.2% this year, undercutting Paulson’s bearish position.

But sure, all you pension managers out there should continue to consolidate your hedge fund allocations to just the 'smartest' hedge fund managers.